Delingpole on Friday: governments can’t spend their way out of a recession by stimulating demand.

He can cope with serial killers – “It’s just serial people who vote Conservative all the time I find very difficult to understand.”

This is a line from a Guardian interview with the British lawyer Clive Stafford Smith who campaigns on behalf of killers on death row. He’s clearly a very committed individual who feels passionately about injustice. But there’s one category of people, apparently, which deserves exemption from his beneficence. When asked at the talks he gives whether there’s any defendant he wouldn’t represent, he likes to reply: “Well I’m sorry, I just couldn’t represent a Tory.”

Since this point is made twice in the interview without any attempt at retraction one can only assumes he means it.
I’m not at all surprised by this: it’s the sort of thing you hear left-liberals saying about right-wing people all the time. What would surprise me much, much more would be to hear a right-wing person say such a thing about anyone on the left. Especially not one as intelligent and well-educated (Radley; Columbia University Law school) as Stafford-Smith.
And it’s not because I think those of us on the right are necessarily nicer than those on the left. It’s just that we view our ideological opponents in an entirely different way.

They hate us because they think we’re evil.
We pity or despise them because we know they’re stupid.
This is not, I realise, a particularly original observation. But I don’t think it has ever been quite so germane as in our present global economic crisis. Surely you need to be quite desperately, unbelievably obtuse not to appreciate the following:

1. The State has no money of its own: only what it takes from the productive sector of the economy via taxation, or from future generations by borrowing or money-printing.

2. The harder the State squeezes the productive sector, the less the productive sector becomes either able or willing to produce. This causes the economy to shrink, making things harder for everyone, rich and poor, but most especially for the poor.

3. We have seen empirical proof of this, not only in cases like the collapse of the Soviet Union, but also in examples like the relative economic performances of heavily regulated, relatively high-tax and socialised economies like Europe’s and of more free market, low-tax economies like Hong Kong’s and Singapore’s. In the latter, everyone – rich and poor alike – gets better off more quickly.

4. The world is stuck in an economic crisis at least as bad as – and probably more intractable – than the Great Depression. Convenient though it is to blame it all on bankers’ greed, poor regulation, etc, the root cause is this: for many decades the Western economies have been spending more than they can afford and are now heavily in debt.

5. The solution to a debt crisis is NOT more spending (still less more borrowing) – which merely kicks the can down the road, transforms a serious problem into an even bigger one, increasing the likelihood that something barely controllable will spiral completely out of control, resulting in civil unrest, hyperinflation and economic chaos.

6. Therefore it follows that there is nothing caring or superior in campaigning for government spending to be kept at current levels, let alone increased. Not only is it intellectualy dishonest, but it is hypocritical and immoral. In the guise of concern for the poor and needy in society, it agitates for precisely those policies most guaranteed to make things worse for everyone.

Why then, given that this ought to be stunningly, breathtakingly obvious to anyone with even half a brain cell, do people on the left – not just the patently thick, ill-educated, lumpen-lefties, but the notionally clever ones too – still persist even now in arguing otherwise?

Why, across the BBC, ABC, MSNBC, the Guardian, the Independent, the New York Times, New Republic, the New Statesman, Slate, Salon and the rest do we find the usual suspects from Polly Toynbee to Paul Krugman, from Jon Snow to Keith Olbermann continuously offering barely differentiated variations on the same utterly discredited theme: that more government spending (and wealth redistribution and taxation and regulation and intervention) is a good thing and that less of it is a bad thing?

What is it about reality that these people do not get?

Well I’ve thought about this a lot and it seems to me that there is only one possible excuse which might offer a shred of intellectual justification for their thinking the way they do. Could it be that these people really, truly still believe, despite everything, in the Keynes fairy? Do they actually think that the government, by confiscating money from some people and redistributing it among others, can create some kind of virtuous cycle of consumer spending which leads to economic growth and prosperity for all?

I think they do. And superficially, I guess, it doesn’t seem such an unreasonable idea.

Let’s assume, for simplicity’s sake, that without government spending the poor would have no money, but that with government spending the poor have, say, £50 a week. Well, suddenly, there is £50 a week going into the pockets of bookmakers, publicans, fish-and-chip-shop-owners, Iceland-check-out-girls and so on and so forth. This in turn means that all the bookmakers, publicans, fish-and-chip-shop-owners, etc have more money to spend on whatever they want to spend their money on. Thus does the economy grow – and all thanks to the benign hand of the friendly, caring state.

Then, of course, there’s capital projects. Let’s again, assume for simplicity’s sake, that these are not a case of money being spunked against the wall on something as pointless as HS2 but that these capital projects are necessary and worthwhile: a new airport serving London, say. Well, here again – is the virtuous State in action, creating jobs, using its muscle to achieve something far and beyond what the private sector ever could.

Now something about all this smells fishy to me. It goes against all my classical liberal/free market/Austrian/libertarian instincts. But what I lack, unfortunately, is the economic grounding to explain precisely why it’s problematic. And I believe it’s hugely important that those of us on our side of the argument find a compelling way of doing so because until we succeed the enemy has got us over a barrel.

Do you see what I’m getting at? It’s not enough – as we do all the time – to point out the myriad examples from history where Statism has been tested to destruction (lefties never were much interested in empiricism).
What we need to do is find a way of expressing, lucidly, entertainingly, persuasively, why it is that all those liberal-lefties who believe that it makes economic sense for government to go on spending at current levels are not just wrong but demonstrably wrong.

So that’s my challenge to you, Bogpaper readers. Especially those of an economic bent. In no fewer than 200 words and no more than 1000, whether through the medium of parable, reductio ad absurdum, learned essay, or whatever your preferred mode, I invite you to nail once and for all this dangerous lefty notion that governments can spend their way out of a recession by stimulating demand.
I’ll be inviting my erudite chums at places like the Cobden Centre, the Adam Smith Institute, Von Mises, the Centre for Policy Studies, Reason, Telegraph blogs, the Commentator, Guido et al to have a go. If Jamie Whyte – hint hint – doesn’t have a stab, for example, I would consider him a pathetic girl and a total failure and would be ashamed to have won a Bastiat prize in the same year he did. Just sayin’.

In return, I can’t promise much by way of a prize other than a) having the top three essays awarded pride of place here at Bogpaper.com and b) the satisfaction of having solved once and for arguably the most intractable problem of our time.
And c) something else nice which I haven’t quite decided yet but which I’ll discuss with the Bogpaper crew.

You up for it? Good. The place to send your entries is bogpaper@gmail.com. Deadline: March 21.

42 comments on “Delingpole on Friday: governments can’t spend their way out of a recession by stimulating demand.”

That £50 has to come from somewhere and, as you said, the state has no money of its own therefore that money has come from the taxpayer or been borrowed (ultimately paid for by the taxpayer plus interest). Someone has therefore been deprived of £50 that *they* could have spent at the bookies. In other words, redistribution of wealth. Not growth.
Unless you create and sell something to someone from a foreign land (with an unconnected currency), you are just moving money around in circles. Which is why Eurozone countries selling things to each other just moves money from one place to another (usually Germany) and doesn’t achieve real growth.
In the end, the country needs to make a profit. The only way I can see a government spending splurge leading to real growth is by direct investment in an industry with export potential – but (as with Airbus) competitors would likely cry foul about unfair economic advantage etc.
A much better alternative is not spending or investment in those industries but creating a fiscal environment that encourages private investment – lower taxes, bureaucracy and making it illegal to talk about “carbon footprints” and other such bollocks in any recognised centre of commercial activity. In short, exit the EU!

The recipients who you say were getting nothing, would die, so they would MAKE SURE that they got something, even if they nicked it and they would probably have scored more anyway through their own “enterprise”.

If you forget that bit, it looks like government is munificent and that they are working a miracle.

We get caught by prestidigitateurs all the time and we never learn.

I know that’s less than two hundred words, but it is definitely succinct (and probably wrong!).

The recipients who you say were getting nothing, would die, so they would MAKE SURE that they got something, even if they nicked it and they would probably have scored more anyway through their own “enterprise”.

If you forget that bit, it looks like government is munificent and that they are working a miracle.

We get caught by prestidigitateurs all the time and we never learn.

I know that’s less than two hundred words, but it is definitely succinct (and probably wrong!).

There is no left and right in today’s politics … The real differences in today’s party policies are negligible .. The guys who control the money supply control everything worth controlling . So all the huge spending is financed with borrowing and of course it’s the application of interest which provides their control . Why wouldn’t an independent nation print its own money at no cost to itself ?

Also if something makes no sense , why do we always stop short of declaring a fraud ?

For example when Al Gore continues to promote AGW and the carbon credit policy which is adopted why do we not look to the massive wealth he has created for himself and immediately understand his motivation ? Or after Blair has invaded Iraq and found no WMD , then quits office and walks straight into huge wealth …why don’t we immediately understand his motivation ?

Doesn’t anyone else find it strange that Prescott bush who was a director of a bank whose assets were seized during ww2 under the trading with the enemy act would go on to father the presidents ?

Why do we accept that the invasion of Libya was on humanitarian grounds ? How could a band of rebels set up a new central bank in march 11 prior to the invasion ? Why don’t we question who has assumed control of their money supply now ? Do the Libyan people understand that is what has happened ? The old notes are no longer valid .. The new notes are still called dinar so it’s an easy deception … The new currency is pegged to SDR .. Again the man in the street with no knowledge of central banking would not know about that so another easy fraud .

I suggest contacting Thomas Woods Jr of the Mises Institute, he is an excellent communicator with a deep knowledge of Austrian economics – his story of the drunk architect and the house is an excellent illustration of his points and he mentions it in many of his speeches.
I do believe that the more informed lefties buy into a warped interpretation of Keynesianism. Keynes was a really smart guy but his economic theories have been interpreted by those in power as a licence to tax (and borrow) and spend senselessly and without thought for the future. Keynes actually advocated using spending and taxation in a more nuanced way to smooth out economic peaks and troughs (boom and bust) – i.e. you save for a rainy day in the good times and use stimulus spending in the bad times. However those in power saw this as a green light to spend, spend, spend.
Austrian economists argue that government taxation and spending leads to artificial situations and a misallocation of resources instead of flowing naturally to more efficient areas (I think of money flowing like water, it follows the path of least resistance).
I sometimes think that lefties benefit from some misconceptions among the public which presents a challenge to overcome.
Misconception 1: media and other sources often refer to government spending as ‘investment’ – when in fact it is an asset transfer away from hard working taxpayers which they would have otherwise spent/invested elsewhere.
Misconception 2: that money in savings accounts is not being used – when in fact that money can be lent via banks and thus continue to stimulate the economy.
Misconception 3: some people argue that so-called ‘quantitative easing’ helps to stimulate the economy – when in fact this does nothing to expand available resources – money is merely a medium of exchange with no intrinsic value. One of the government incentives for doing this is to devalue debts.
Misconception 4: these same people probably trust government agencies to spend money effectively, when in fact it adds significant admin costs and is subject to political motives rather than the profit motive. Additionally these government agencies have no fear of bankruptcy and liquidation to focus their minds on sensible spending and cost-saving.
Misconception 5: that higher tax rates and increased stealth taxes (such as a proposed duty on sugary drinks) help to increase government revenue but it causes the wealthy to transfer money abroad, reduces incentives to make money among other side effects – so there’s no guarantee it will significantly increase government revenue and it will impact on other areas within the economy.

James Delingpole wrote:
“What is it about reality that these people do not get?”

I believe that the answer to this question is quite simple, it’s the following:

Reality.

What do I mean by that? Surely leftists can look around them and see the world? Yes, I think that they can. But as far as I can tell, they look on it with a different mindset to people on the right.

I’ll try to explain.

Leftist thinking seems to start with nothing, absolutely nothing. Then, you start to imagine the kind of things that you would like in a perfect world. So, things like universal happiness, no poverty, no crime, abundant honesty, hard-working and dedicated citizens, healthy environment, healthy long living citizens, no disease, abundant cute kittens etc, etc. Now you get to the point where you can open your eyes and look around you.

I believe, it is important at this point to understand the perspective that is required when you look at the world. You aren’t interested in history, you aren’t interested in how the world works and you aren’t interested in who wants what. What you are looking for is differences. Differences between the world that you see and the world of your dreams. Once you have found these differences, you call them “problems”. All you have to do is to fix these problems, and your dream will be realized.

So you now need a mechanism for acting on the world. In order to change a world, you are going to need power and lots of it. So you aren’t going to suggest using charities or people movements, or altruism or something like that. What you want is a government, and a big one at that.

Now that you have a government, what policies will this government have? Well it will need income, so it will need to raise taxes. Since you want a big powerful government you will need lots of tax, so you may as well tax everything, and since you don’t want to tax people into poverty (because that isn’t in your utopia), you shall tax people and companies based on their ability to pay.

You need a strong economy in your utopia. So your government shall plan this economy, (you don’t want some independent minded idiot messing it up) and it shall regulate all the industries in the economy and it shall create universities and science labs to create new technology. The new technology will be commercialized by government technology commercialization units. They will found proto-businesses, before releasing them into the regulated private sector.

Your nation shall have public services so that things don’t go wrong. The police will ensure that there is no crime, the health service shall ensure that there are no sick and local councils shall ensure that people don’t extend their houses or construct buildings so as to disturb their neighbours. Your military will ensure that your nation does not get invaded, and that you can spread your utopian ideals into other countries if necessary.

An electoral system is needed, so the nation shall have a proportional representation based system, so that everyone’s vote counts, and elections are seen to be fair.

Now you need some justification for the actions that your government will take. It must become and remain popular in order to win elections, and so you need an ideology that describes the functions of government.

So when you want to run the economy you need an economic ideology that tells you that your government can do this. So this description of reality, (because that is in effect what it is) must tell you that any economic problem can be fixed with government intervention. If the economic ideology doesn’t tell you this, then you must get one that does.

Your government must have ideologies and principles that explain what it is trying to achieve in its public policy. You want to eliminate poverty, the reason for this is that there isn’t any in your utopia, but the reason that you shall give to other people is because your government cares. This will encourage people to vote for this system. You will do this by ensuring that everyone has work and by redistributing money to those people who earn low wages.
The government shall keep people healthy with its health service. This will happen because the government cares.
The government shall eliminate crime. This is so that citizens can have liberty, that is, the freedom to travel where they like in our nation at any time of day or night and feel safe.

I think that readers should get the idea by now. The point that I am trying to make, is that to a leftist, how the world “works” is irrelevant. And a right-winger describing to a leftist, that they have a model of how the world “works”, simply makes them look like an idiot with no imagination that can’t envisage a better future.

On the other hand, maybe the right-winger isn’t an idiot. Maybe they are putting forward their model to try to con others into doing their bidding. Maybe they wish to profit at others expense. Maybe the right-winger is evil. Therefore, you, as a dreamer, as someone who has a vision, who can solve all the world’s problems, you will oppose the right-wingers, you will hate them, and you will not rest until they are destroyed and justice is seen to prevail.

Oh, and misconception 6: that governments have the moral authority to take someone’s hard earned savings and give it to someone else – taking money off someone through the threat of force would be called robbery if anyone else did it. On a side note, the EU is all about asset transfer – they are taking money off countries like the UK and Germany, keeping a large slice for themselves and then giving the money to the poorer EU countries – economically, I guess they could argue that they are developing export markets but who the hell gave these people the authority to do this?
These misconceptions need to be challenged in my opinion if we are going to discredit lefty economic thinking. Fortunately the Austrian School of Economics is on the case but most people have no idea who they are and most people are primed and conditioned into leftwing thinking via the education system and MSM so consequently the Left has so many useful idiots who support them.
I will be very interested to read people’s answers to your challenge James – if people have access to persuasive arguments then classical liberal ideas can gain more support through word of mouth

In certain aspects, government spending is needed. For example, infrastructure projects which not only provide jobs now but in the long run, help the economy grow. Examples would be the motorways in the past and building a third runway at Heathrow which operates at 99% capacity.

Borrowing money, as the UK does at £120 billion a year, giving it as overseas aid (£12 billion), welfare payments and the EU is wasted. Now before people have a go at me, I believe that if you are collecting dole, you should be doing something other than watching daytime TV. For example, you could be on a training course, cleaning roads or parks or even stacking shelves in Poundland.

The only way the economy will grow, is by reducing the taxation, where business people and entrepeneurs, feel it worthwhile to invest both their time, sweat and money. Adding more social taxes and bureaucracy will have the opposite effect.

In economics, the Laffer curve represents the amount of revenue a government receives with respect to the tax level. According to a study of the US economy between 1959 and 1991, the maximum is between 32 and 35%.

From the New York Times:

A funny thing often happens on the way to soaking the rich: They don’t stick around for the bath. Take Britain, where Her Majesty’s Revenue and Customs service reports that the number of taxpayers declaring £1 million a year in income fell by more than 60% in fiscal 2010-2011 from the year before.

That was the year that millionaires became liable for the 50% income-tax rate that Gordon Brown’s government introduced in its final days in 2010, up from the previous 40% rate. Lo, the total number of millionaire tax filers plunged to 6,000 in 2010-2011, from 16,000 in 2009-2010.

The new tax was meant to raise about £2.5 billion more revenue. So much for that. In 2009-2010 British millionaires contributed about £13.4 billion to the public coffers, or just under 9% of the total tax liability of all taxpayers that year. At the 50% rate, the shrunken pool yielded £6.5 billion, or about 4.4%.

Compare the US tax rate on income over $200,000 in 1980 with 1988. In 1980 the tax rate was 70% and in 1988 it was 28%. The government collected over 5 times more in 1988 than 1980; $99 billion instead of $19 billion.

Here’s a link to brief video of Thomas Woods explaining how government manipulation of the economy creates problems – this one is about interest rates and Mises house builder metaphor but the principle can be extended to other State intervention in the economy – it creates desynchronisation and misallocation of resources

I would describe the economy as an abstract ecosystem. With ideal meritocratic capitalism, the (monetary) rewards go to whoever creates value. Politics make the real world less than ideal, of course, but according to suggested alternatives the rewards should go directly through designated processors. Which incentives are created in each case? Which skills are selected for in each ecosystem?

I’ll be working on expanding this analogy, but it’s a good thought exercise.

I think you’ve done a great job at encapsulating the typical lefty useful idiot mindset there, well done. With such obtuse, childlike mindsets and a deep suspicion of anything that might come from the ‘evil’ right, they can be very difficult to reason with

In talking to left wing politicians from both sides of the political divide I find that they are not particularly interested in productivity. What concerns them is modifying the behavior of the populace so that they behave in a particular way.

Taxes and fines are used as instruments to enforce compliance with the way politicians want us to behave.

The left wing idea of good behavior is not that we obey the reasonable laws of a civilised society but that we live, think and exist in the way they stipulate. The antithesis of a free society.

The market economy allocates resources against requirements (supply and demand). People produce stuff other people need, and people need stuff other people produce, and we signal to each other via prices and purchases exactly how much of each product is wanted, which products are worth the effort to make, and what’s the best way of making them.

It’s like neurones in a brain. Each individual neurone has no idea what’s going on – it just signals to a network of neighbours based on the signals it gets. But collectively an economy knows what it’s doing.

A recession happens when it realises it has got the allocation wrong and has to readjust. It has to stop doing one thing, move its resources around, rebalance everything, and start up again with the new setup. It results in lots of businesses going bust, lots of people unemployed, a drop in production, and a drop in the availability of the stuff people want. The entire process of readjustment takes about two years.

A government economic stimulus is an attempt to stop this happening. It’s an attempt to signal that things were fine the way they were, don’t stop what you were doing. But it’s a crude signal, like giving a brain amphetamines, and it can’t reproduce the fine balance of signals in the previously healthy economy.

It screams “Don’t hesitate! Keep moving!” but it doesn’t say doing what. It’s not signalling what people actually want, it’s generating huge artificial demands for things people don’t really want, purely so they can produce them. It is the equivalent of employing half the people to dig holes and employing the other half to fill them in again. It tries to get the economy high, so it runs around madly crashing into walls and babbling about giant spiders. Anything, anything, so long as something is being done.

The problem is that politicians believe their own hype and think they’re actually in control, and that terrifies them because they know themselves they have no clue what they’re doing. They shout panicked instructions to the economy, sluicing huge flows of public money into the price-signalling channels, first one way, and then the other, and the shambling monster keeps stumbling and hesitating and turning round as it realises repeatedly it’s going the wrong way.

The only way to ‘win the argument’ is by asserting your rights, a concept that has been debased worse than the currency by inflating it nonsensically. There is no ‘right’ of any group because, by the nature of it, rights are possessed only by individuals. Concept abuse has obscured this axiom.
Rights begin with ownership of self. That means that you own yourself. The corollary is that nobody else does. Rights are exclusive. Because rights are exclusive, there can be no conflict of rights.
The only argument needed against anybody who proposes to rule or rob you is ‘NO, you do not own me’, possibly punctuated with ‘BANG’ if the robber/rapist won’t listen to reason.
You own yourself, you own what you create.
Nobody else has a right to dispose of your life or your labors and the fruits thereof without your approval and consent.
You own your body; you own your mind; you own your labor; you own what you use yourself for.
You do not belong to anybody but yourself – that is the definition of a slave – unless you are a slave.
You will not argue a robber or rapist or slave master out of exercising his self defined nature by negotiating. Debate is negotiation and if it’s negotiated, it’s not rape nor robbery nor slavery – it is a business deal.
The ‘girl who can’t say no’ hasn’t a leg to stand on.

It’s the psychology of trauma: when Reagan and Nixon went hippie hunting as tens of thousands of boys were slaughtered in Vietnam and after both JFK and MLK were assassinated and Tim Leary was thrown in jail, a whole generation was massively radicalized and to this day are swinging elections to wage a culture war against abortion banning, stem cell banning, condom and clean needle banning, evolution banning and neuroscience banning puritans who fail to actually offer a truly small government alternative that embraces liberty and the pursuit of happiness.

While it will be interesting to see well written responses to this issue of taxation and spending as the way to Nirvana, [Note, the wiki says that last word means “blown out” – as in budget?], your local defender of serial killers will not be impressed. The key to this is in the use of the word “injustice” (2nd paragraph, 4th line).

Think of it this way – Some people are sufficiently well-off that they exist above a poverty-line. Other people are not so well-off. Society is evil because this is so, and until fixed, will remain evil. Those that understand this fact and wish to lead us all to a better level of existence do not base their belief on economics, but on injustice. Those that wish to do the leading, lets call them élites, assume they are above all this because they will use there wealth and status to help everyone else.

The élites want everyone else to feel guilty about the injustice in the world and because everyone does not follow their advice, then the guilty and evil ones must be forced by law to do so. So, take something like starting a business and giving a dozen people a “living wage.” That doesn’t work properly because the entrepreneur could reasonably be expected to feel a sense of accomplishment, rather than feeling guilty. One might also expect the entrepreneur to be wealthier than before and still better-off than the workers newly employed. But, still, the dozen plus one contribute to the total injustice — they have some liberty, and are not beholding to the élites for justice.

I trust the above is enough (books could be, probably have been written) to suggest why economic arguments will not sway your serial left intelligent and well-educated Stafford-Smith and friends. They are the élite. You are guilty of evil.

OK, I’m willing to be your stupid lefty liberal pinata.
Let’s start with your bullet points:
1. Yes, government revenue comes from taxes or debt issuance.
2. Yes, increasing taxes *normally* results in reduced private spending which, if not directly converted to government spending, would reduce overall GDP.
3. To some degree, yes, but there’s more correlation here than causation. Sweden, for example, represents a pretty big fly in the ointment.
4. Yes, that’s mostly true; put another way: the depression exists because vast numbers of economic actors in the private economy are balance-sheet constrained and because those who aren’t have chosen not to spend.
5. Here’s where you trip up. You’re asserting something for which you have no evidence. It *seems* like it ought to be true but it’s not. Your stupid lefty liberals have grasped some key fact here that you’re missing. If you can figure out what that is, perhaps you’ll understand why they’re not so stupid.

Some clues to get you started:
Japan’s debt is over 230% of GDP and there is no civil unrest, hyperinflation or economic chaos. Why is that?
For the last four years we’ve been hearing how we’re going to turn into Greece or Zimbabwe if we don’t cut spending now, now, now! Why hasn’t any of that happened?
Why, despite a sovereign debt downgrade, has the Confidence Fairy not deserted us? Why have the Bond Vigilantes not arrived to punish us for our profligacy?

Let me also touch on this section of your post:
“Could it be that these people really, truly still believe, despite everything, in the Keynes fairy? Do they actually think that the government, by confiscating money from some people and redistributing it among others, can create some kind of virtuous cycle of consumer spending which leads to economic growth and prosperity for all?”

There are two problems here. First, when you say “despite everything”, it might be helpful for you to provide the despicable liberals with the damning evidence that disproves Keynesianism.
Second, you’re making a mistake when you assume that taxation is merely a zero-sum game of robbing Peter to pay Paul. For one thing, Peter isn’t spending the money: Paul will and basic economic theory tells us that his spending has a multiplier effect.

Now, I think your mistake arises because, while under normal circumstances it might be true, our current circumstances are far from normal and many of the rules we think apply, do not. There’s something very peculiar that happens when a country’s economy is in a balance sheet recession, rates are up against the zero lower bound *and* it controls its own currency. It’s a Liquidity Trap where monetary policy has little effect…but where there’s no “crowding out” of private investment when the government increases spending.

Finally, I would encourage you to take some time to think about the stupid lefty liberals’ counter-argument:
Given the basic economic principle that your spending is my income and my spending is your income, if we all choose to cut our spending, our income (i.e. GDP) will fall. If you then ask the only remaining economic agent in the economy who has the clout to take up the slack (the government) to cut spending as well, then GDP logically must fall even more.

What makes the deficit reduction idea worse is that, since the government spending cuts depress the economy, they will also result in higher unemployment, reduced tax revenues and increased spending on automatic stabilisers like unemployment benefits which…increases the deficit. In other words, you end up where you started but with the bonus side effect that more people are suffering and your Debt to GDP ratio is worse.

This is the argument you need to address. I wish you the best of luck because there’s a dearth of evidence to support you.

3. Sweden, like much of Europe, still has a relatively high unemployment rate relative to economies where government spending is a lower % of GDP. You also neglect to say that Sweden has actually reduced the progressivity of its tax code and reduced the amount of government spending as a % of GDP since the 90’s coincident with the improvement of its economic and fiscal prospects. Sweden does not significantly bolster your point and offers counterpoints itself.

5. Actually they haven’t grasped anything. Japan’s example is hardly encouraging. Expansive monetary policy and excessive government debt have resulted in no or slow clearing of the economy of all of the zombie institutions created in the 90’s. The lost decade has now become the lost two decades and there is really no end in sight. I note that you conveniently neglect to cite the examples of Zimbabwe, Argentina, and the Weimar Republic (I think you Brits rather disliked the outcome of that last one…). That fact that the bond market hasn’t attacked the UK or the US yet is hardly proof that it won’t. Look at how quickly Italian and Spanish rates rose. Sure, the BoE and the US Fed can continue to print money with which to buy their local debt but there is simply no way to avoid the inflation that is inevitable from that action.

“Second, you’re making a mistake when you assume that taxation is merely a zero-sum game of robbing Peter to pay Paul. For one thing, Peter isn’t spending the money: Paul will and basic economic theory tells us that his spending has a multiplier effect.”

Oh dear, sweet God. OK, let me show you the obvious fallacy of that argument. Some French guy figured it out a couple of centuries ago. A boy throws a rock and breaks a window. The owner of that window pays the glazier to replace it. The glazier uses that money to buy a loaf of bread. The baker uses that money to buy a pair of shoes, etc. That is your supposed multiplier. Have you spotted the flaw yet? It was right at the beginning. The owner of the window is poorer because he had to pay to replace the window.

You make a host of flawed assumptions in your argument. The first is that the money is doing nothing ans sitting idle.Some of the money maybe, but that deferred consumption (savings) is also providing capital for new projects which will lead to future increases in wealth. Now that is classic economic theory. The second and larger flawed assumption you make is that you assume the government will spend that money wisely. Not all economic activity is created equal. In the strictest sense Keynesianism says that any spending is good. The classic counter example of that is hiring 1000 people to dig holes and another 1000 people to fill them back up. In the end you have wasted labor and money and produced… nothing.

Finally, your argument essentially consists of hair-of-the-dog. What you fail to realize is that it was government in the first place that helped generate the very condition you lament. Excessively (unnaturally) low interest rates by the Fed and other bodies encouraged the assumption of debt and misallocation of resources resulting in an unhealthy economy. The solution is not to perpetuate the misallocation but to fix it. More heroine does not cure your addiction or make you healthy.

As to your dearth of evidence, it’s actually quite the opposite. There is precious little evidence that Keynesian policy has fixed economic problems historically.

The US has engaged in massive Keynesian policy for over 4 years now (6+% deficits every year). Unemployment, when accounting for the reduced labor participation rate, remains effectively just below 10%. Yes, the headline number is 7.9%, but 2% fewer Americans are actively participating in the labor force than were two years ago. And even though the disability roles have become convenient rest stops (homes?) for many of them, that does not invalidate the fact that massive deficit spending has simply failed to generate the growth that the Keynesians predicted. Krugman got some ‘splainin to do…

I hope you don’t mind me stepping in to answer some of your points. There’s a lot of confusion about these matters. Some of James’ concerns were correct but not very precisely expressed, it may be this that led you in turn to make the observations that you have.

“Japan’s debt is over 230% of GDP and there is no civil unrest, hyperinflation or economic chaos. Why is that? ”
It’s because they are not directly related. What I think James was trying to say was that fiscal mismanagement can lead to those symptoms. Japan’s debt to GDP ratio is also a symptom, not a cause.
Hyperinflation is caused by the money supply wildly exceeding the value of the goods and services it represents. What makes it ‘hyper’ is the ‘wildly’.
Japan has largely kept the balance between money and goods/services but the value is stored in the debt. The key point here is that Japan borrowed rather than printed. If it had just printed, it would have de-coupled the relationship between money supply and goods/services and inflation would have been the result.
Borrowing is actually inflationary if from another country (or to be more precise – another currency) but in Japan’s case, the borrowing was from domestic savers (as was the case in Italy).

Greece and Zimbabwe have completely different problems. Zimbabwe’s hyperinflation was because of government money-printing. They wished to spend more (much more) than then they could tax. They exhausted the availability of loans and then started to print new money. It was at this point that they de-coupled the relationship between money supply and goods/services. It was the amount of money that they printed which determined how bad the hyperinflation would be,

Greece on the other hand, borrowed money that they would never be able to repay. In fact, this has always been Greece’s approach to public finances. A little history will show you that national debt default has been a regular occurrence. The problem is that while they are in the Euro they can neither devalue their currency nor repudiate the debt.

“Why have the Bond Vigilantes not arrived to punish us for our profligacy?”
Actually, they have started to. Consider that the Bank of England now has buy government bonds when there are no other buyers available (the euphemism is “stimulating the economy”). This isn’t a secret or a conspiracy theory – you can check the records of bond auctions for yourself.

“Given the basic economic principle that your spending is my income and my spending is your income, if we all choose to cut our spending, our income (i.e. GDP) will fall. ”
This sentence contains two of the most basic misunderstandings that are prevalent today.
GDP does not represent income. It is a very misleading (and only relatively recently adopted) measurement that counts money twice.
It includes the gross income of the taxed and then counts the taxed amount again when it is spent by the taxer. It includes government spending, while not deducting government borrowing.
It is so misleading that it can actually show a shrinking economy as growing, purely by virtue of an increase in tax revenue – even if the underlying private sector is shrinking.
The “your income/my income” argument is also flawed. If I earn money in the private sector then it is certainly true that it becomes your income (in the form of tax) if you are the government. However, when the government spends that money back into the private sector it is certainly not income – it is a return of a part (and only a part) of the money that was taken in the first place. This is true both at a micro and macro level.
It’s a cliché but it is correct – it’s like the Mafia taking money from a café owner and then paying him for for the food they eat there. They have produced nothing and provided no service, yet they could argue that their spending is his income.

This is now too long so I’m not going to get started about the “money multiplier”.

Most interesting, all of this. I fear the trouble is that the MMS who effectively control our world, are only too content with the status quo. So they should be, they created it. Their inability to see good sense is a wilful blindness, since they are the beneficiaries of maintaining it as it is.

Regretably they are unlikely to change their minds through cunning arguments, or even well-crafted humour.

For these sons of Belial the only thing they really fear is the gas chamber. Now this is a hateful concept and not one which civilised people can entertain. So here we are ….

The main problem with this analysis is that it could be used (and is used) to defend government debt as a good thing. Even if it is true that some redistribution of wealth helps to stimulate the economy (more spending) sooner or later books have to be balanced. There is no ‘free’ money it has to be created in the private sector. Japan’s stagnent economy is not a model for success that we should follow even if they are not quite having the same problems as Greece.

“Let’s assume, for simplicity’s sake, that without government spending the poor would have no money, but that with government spending the poor have, say, £50 a week. Well, suddenly, there is £50 a week going into the pockets of bookmakers, publicans, fish-and-chip-shop-owners, Iceland-check-out-girls and so on and so forth. This in turn means that all the bookmakers, publicans, fish-and-chip-shop-owners, etc have more money to spend on whatever they want to spend their money on. Thus does the economy grow – and all thanks to the benign hand of the friendly, caring state.!”

Problem with this analysis is that it contains a circular system. The Iceland girl may get paid, but only with money which has been taken from her in the first place so there’s no real growth in the system. Also there’s all the inefficiency ‘fiscal drag’ of the collection of taxes and the distribution as pay.

Hello Data Driven Liberal, I noticed your post today so I will try to answer your points. Firstly, I don’t think all lefties are stupid, obviously there are some clever ones too. I also don’t claim to have all the answers but I thought I’d get the ball rolling by raising a few points – I still think James should contact a professional from the Mises Institute for a really good answer.

Anyway with regard to point 5 about raising taxes I accept there are lots of variables at work here that can affect the resulting revenue. Middle and low income earners don’t have the mobility of the rich and so they have little choice with regard to tax hikes. I guess you lefties would argue that the State gives stuff back like roads, streetlighting, hospitals, law and order etc so it becomes a question of how many people are happy to pay extra for these things. Of those that are unhappy, how many are willing and able to do something about it? Not many, especially in elitist countries like Britain and Japan. With the rich, it’s much easier for them to leave (Chris made an excellent post about this already).

Japan has high debts but they are also a highly developed economy that produces and exports many high value goods and has a skilled, well-educated workforce so this helps the economy to remain secure. Even so, high GDP debts are nothing to be complacent about and paying the interest on those debts hurts GDP growth. Japan’s GDP growth isn’t great but at least they aren’t having to deal with a population explosion nor do they have persistent deficits in their balance of payments. It can be argued that Japan can deal with these high debts due to it’s other other strengths.
Britain is another case, our GDP growth has flatlined and we also have an open door immigration policy (pretty much) so that static GDP pie is spread between more and more people each year. Britain’s balance of trade also runs at a deficit year in year out too so we are gradually bleeding out spending power to other countries and this appears to be a structural situation with no sign of improvement. So our situation is different to Japan’s – they may have higher debts now but their economy is stable, we have lower debts but our economy is deteriorating.
I don’t think Britain will experience a situation like Greece as the kleptocrats will do everything in their power to mask that problem – instead they will preside over a managed and steady decline where taxpayers pay more and more but government services become steadily shoddier and people have less meaningful career opportunities as there are less employment opportunities available. So unless something is done about it Britain will get steadily worse and one day people will look around and Britain will feel miserable and deprived like 1970s Russia.

You then go on to quote me but you have actually quoted James but I’m happy to answer it anyway. Firstly, I actually have a lot of respect for Keynes and I think his theories are sensible based on my understanding of them but the problem is that for decades UK governments have spent like crazy and called it Keynesianism. Keynes advocated demand management through government spending AND saving. The government and it’s agencies has also been wasteful with this spending and it doesn’t consult the public much over it’s decisions so people feel disempowered against a massive State machine that just grows and grows without end. Corporate welfare, public sector chief executives, Quangos, and high powered lobby groups are all unfortunate manifestations of UK tax and spend governments.
In answer to your Peter and Paul analogy, Peter may not be spending but his savings will be in a bank which can be loaned to Paul and so continue to stimulate the economy. Savings are not unused assets within a developed economy.

With regard to liquidity traps and the government acting as an economic agent where private individuals are unwilling to spend I would argue that it’s a matter of giving people time to adjust to new conditions as well as communicating intended spending cuts ahead of time. If this is managed properly then private individuals will take up the slack if given enough time and they should also respond fairly quickly. I view government spending cuts as something that must happen if Britain is going to turn it’s fortunes around.

Where leftwingers genuinely have the interests of ordinary people at heart I am willing to hear them out and I also studied British history and have respect for groups such as the Chartists and original Labour Party but it’s hard to take modern leftwingers seriously these days when it’s represented by people like Polly Toynbee, Michael White, John Prescott etc.

The plan to reduce Britain to 70s Russia is laid out in UN Agenda 21, which proposes:
The equalisation of wealth between countries & between continents.
The culling of 80%-90% of the world population to “sustainable” levels.
The abolition of private property.
The abolition of the family.
& one world govt, for which the EU is seen as the forerunner.

Hi jdseanjd, I will check out the links you have provided and will be interested to learn more. I’ve previously read about things like cultural marxism, Common Purpose, the Frankfurt school, New World Order, the Bilderberg group and so on – there’s alot of conspiracy theories about these people and it’s difficult to discern truth from paranoia but it all makes me deeply suspicious of these influential lefties and fellow travellers.
Anyway, I’m currently reading an interesting demolition job on Keynes that was written way back in 1959 – ‘The Failure of the “New Economics”‘ by Henry Hazlitt, for anyone interested, here’s a weblink:http://www.mises.org/books/failureofneweconomics.pdf